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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---------
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ---------
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to
Commission file number 000-25229
---------
SKYNET HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-1480559
------------------------------- ---------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6165 Barfield Road, Suite 200, Atlanta, GA 30328
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 847-3120
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of January 31, 2000, the Registrant had issued and outstanding
20,636,190 shares of Common Stock, $.0001 par value per share.
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SKYNET HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 1998 and 1999 4
Condensed Consolidated Statements of Operations for the
Six Months Ended December 31, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
SKYNET HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,568,529 $ 883,253
Receivables, net 15,491,457 18,830,723
Prepaid expenses and other 1,300,738 1,777,325
------------- ------------
Total current assets 18,360,724 21,491,301
Property and equipment, net 8,294,361 6,615,173
Intangible and other assets, net 17,860,076 19,755,012
------------- ------------
$ 44,515,161 $ 47,861,486
============= ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 16,994,751 $ 19,606,398
Short-term debt (Note 2) 9,280,153 10,507,072
Other accrued liabilities 8,860,391 6,543,338
Current portion of long-term debt 530,509 390,273
------------- ------------
Total current liabilities 35,665,804 37,047,081
------------- ------------
Long-term debt, net of current portion (Note 3) 859,723 9,823,481
------------- ------------
Stockholders' Equity
Convertible preferred stock, $.0001 par value,
5,000,000 shares authorized; 2,852,368,
shares issued and outstanding
(liquidation preference $11,298,000) 285 285
Common stock, $.0001 par value, 50,000,000 shares
authorized; 19,504,618 and 20,261,190 shares issued and
outstanding. 1,950 2,026
Additional paid-in capital 14,326,215 15,871,582
Foreign currency translation adjustment 123,577 43,575
Accumulated deficit (6,462,393) (14,926,544)
------------- ------------
Total stockholders' equity 7,989,634 990,924
------------- ------------
$ 44,515,161 $ 47,861,486
============= ============
</TABLE>
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SKYNET HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------------
1998 1999
--------- --------
<S> <C> <C>
Revenues $ 8,877,144 $ 35,352,317
Cost of sales 5,059,102 29,010,419
----------- ------------
Gross profit 3,818,042 6,341,898
----------- ------------
Operating expenses
Compensation 2,134,624 4,320,959
Occupancy costs 142,605 905,043
Communication expense 152,399 601,286
Other operating expenses 1,423,471 4,011,159
----------- ------------
Total operating expenses 3,853,099 9,838,447
----------- ------------
Loss from operations (35,057) (3,496,549)
Other expense
Interest expense (104,616) (1,873,579)
Other (257,274) (786,845)
----------- ------------
Loss before income taxes (396,947) (6,156,973)
Income tax expense (3,220) (6,738)
----------- ------------
Net loss $ (400,167) $ (6,163,711)
=========== ============
Basic loss per common share $ (0.03) $ (0.31)
=========== ============
Diluted loss per common share $ (0.03) $ (0.31)
=========== ============
Basic weighted average number
of common shares outstanding 11,849,287 20,030,913
=========== ============
Diluted weighted average number
of common shares outstanding 11,849,287 20,030,913
=========== ============
</TABLE>
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SKYNET HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues $ 16,947,089 $ 71,575,329
Cost of sales 10,101,814 56,269,671
------------ ------------
Gross profit 6,845,275 15,305,658
------------ ------------
Operating expenses
Compensation 3,998,583 10,714,286
Occupancy costs 277,156 2,069,532
Communication expense 375,670 1,315,114
Other operating expenses 2,540,416 6,194,350
------------ ------------
Total operating expenses 7,191,825 20,293,282
------------ ------------
Loss from operations (346,550) (4,987,624)
Other expense
Interest expense (162,899) (2,144,583)
Other (245,723) (1,326,754)
------------ ------------
Loss before income taxes (755,172) (8,458,961)
Income tax expense (6,300) (5,190)
------------ ------------
Net loss $ (761,472) $ (8,464,151)
============ ============
Basic loss per common share $ (0.06) $ (0.42)
============ ============
Diluted loss per common share $ (0.06) $ (0.42)
============ ============
Basic weighted average number
of common shares outstanding 13,410,368 20,261,190
============ ============
Diluted weighted average number
of common shares outstanding 13,410,368 20,261,190
============ ============
</TABLE>
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SKYNET HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------------------
1998 1999
(Increase (decrease) in cash and
cash equivalents)
----------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (761,472) $ (8,464,151)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 53,182 1,546,632
Changes in operating assets and liabilities:
Receivables (474,211) (3,339,266)
Prepaid expenses and other assets (293,153) (476,588)
Accounts payable (1,317,139) 2,611,647
Accrued expenses and other liabilities 1,237,776 (2,317,052)
------------ ------------
Net cash used in operating activities (1,555,017) (10,438,778)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (107,777) (899,475)
Increase in intangibles and other (145,492) (978,327)
Proceeds from sale of land and building - 1,660,865
------------ ------------
Net cash used in investing activities (253,269) (216,937)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of notes 1,195,538 10,214,405
Bank borrowings 286,678 336,036
Debt repayments (486,538) (500,000)
Proceeds from issuance of common stock 500,000
------------ ------------
Net cash provided by financing activities 1,495,678 10,050,441
------------ ------------
Effect of foreign currency
translation adjustments 53,749 (80,002)
------------ ------------
Net decrease in
cash and cash equivalents (258,859) (685,276)
Cash and cash equivalents,
beginning of period 337,314 1,568,529
------------ ------------
Cash and cash equivalents, end of period $ 78,455 $ 883,253
============ ============
Non-cash financing activities:
Issuance of common stock for financing costs $ - $ 1,545,443
============ ============
</TABLE>
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SKYNET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
The consolidated financial statements include the accounts of Skynet
Holdings, Inc. (the "Company") and its majority-owned subsidiaries. All
significant inter-company transactions and balances have been eliminated. The
accompanying unaudited condensed consolidated financial statements were prepared
on the accrual basis of accounting. In the opinion of management, all
adjustments (consisting only of normal, recurring accruals) which are necessary
for a fair presentation of the financial results for the periods presented have
been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, were condensed or omitted. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended June 30, 1999.
Statements included herein, which are not historical facts, are forward-
looking statements. These statements are based upon information available to
the Company on the date hereof. Inherent in these statements is a variety of
risks and other factors, both known and unknown, and which are described more
fully under the caption "RISK FACTORS" included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999, and which may cause the
Company's actual results to differ materially from those in forward-looking
statements. Accordingly, the realization of forward-looking statements is not
certain, and all such statements should be evaluated based upon the applicable
risks and uncertainties affecting the Company. Consequently, the results of
operations for the six months ended December 31, 1999 are not necessarily
indicative of operations expected for the full year ending June 30, 2000.
Note 2. Short-Term Debt
PONY
In May and October 1998, Pony Express Delivery Services, Inc. ("PONY") and
Courier Express, Inc., a subsidiary of PONY, respectively, entered into loan and
security agreements (the "Credit Agreements") with NationsCredit Commercial
Corporation through its NationsCredit Commercial Funding Division, predecessor
in interest to Bank of America Commercial Finance Corporation, through its
Commercial Funding Division ("Bank of America") which provides for borrowings up
to $9 million under senior revolving credit facilities (the "Credit
Facilities"), subject to certain borrowing limits, as defined in the Credit
Agreements. Amounts outstanding under the Credit Facilities mature May 28, 2002
and bear interest at the prime rate (8.5% at December 31, 1999) plus 1% with
interest payable monthly. The Credit Facilities specify a commitment fee of .25%
per annum to be applied to the unused portion of the Credit Facilities, payable
monthly in arrears. As of December 31, 1999, approximately $5.6 million was
outstanding under the Credit Facilities.
Borrowings under the Credit Agreements are secured by substantially all of
PONY's and Courier Express' assets, whether tangible or intangible, now owned or
in existence or hereafter acquired or arising. The Credit Agreements set forth a
number of covenants, which among other things limit the Company's ability,
without prior written consent, to enter into a merger or any other consolidation
transaction, acquire any assets except in the ordinary course of business, incur
debt, incur liens, make investments, repurchase stock, or make dividend or other
distributions. In consideration for Bank of America giving its consent to the
acquisition of PONY, (i) Fleet Acquisition Corp., Inc. ("Fleet"), a subsidiary
of the Company, became a party
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to the Credit Agreements and pledged certain of its assets as additional
collateral for the obligations under the Loan Agreement, and (ii) the Company
entered into a guaranty agreement with Bank of America whereby the Company
absolutely and unconditionally guarantees to Bank of America the payment and
performance of all now existing and hereafter arising obligations, liabilities
and indebtedness to Bank of America.
On September 29, 1999, Bank of America notified PONY that certain events of
default were committed by PONY under the Credit Agreements relating to failure
to deposit all checks into the blocked bank accounts and failure to pay certain
payroll taxes on a timely basis and accordingly, began charging interest at the
default rate as permitted by the Agreements. On October 6, 1999, Bank of
America notified PONY that the bank would not enforce its rights under the
Agreements through December 4, 1999, which forbearance was subsequently extended
to December 10, 1999. On December 8, 1999, PONY and Bank of America reached an
agreement whereby the lender agreed to (i) continue to forbear from exercising
any remedies available to it on account of the previously-declared defaults
under the Credit Agreements until March 8, 2000, and (ii) waive all previously-
declared defaults upon Bank of America's receipt of a payment by PONY of
$1,000,000 (the "Paydown") on the amount outstanding under the Credit
Agreements. The Paydown must be made by March 8, 2000. Until PONY makes the
Paydown, PONY will be required to make periodic payments of a forbearance fee,
which could total $100,000 depending on when the Paydown is ultimately made.
Once the Paydown is made, PONY will have no further liability for the
forbearance fee. Also, upon the payment by PONY of the Paydown, the Credit
Agreements will be amended to (x) reduce the credit line available to PONY to
$3,000,000; (y) reset the interest rate for loans and advances under the Credit
Agreements to the prime rate of interest plus 3.0% per annum; and (z) revise the
calculation of any early termination fee payable by PONY upon the early
termination of the Credit Agreements to provide for the calculation of any such
fee on the basis of the maximum loan facility under the Credit Agreements on the
date of such termination. If the Paydown is not made by the Company the lender
has the right to apply all funds received in the blocked bank accounts to the
outstanding debt.
Foreign
A foreign subsidiary of the Company has a financing agreement with a bank
in London. The agreement provides borrowing for the subsidiary based on 75% of
customer receivables less than 90 days old up to a maximum of $1,700,000. The
subsidiary pays an administrative charge of .2% plus interest at the bank's base
rate (5.5 % at December 31, 1999) plus 2.25%. Borrowings under the agreement
amounted to $870,352 and $1,042,000 at June 30, 1999 and December 31, 1999,
respectively.
Related Party
On August 2, 1999, Pearlgold Pty. Ltd. (an entity affiliated with a
director of the Company) loaned the Company $687,650 pursuant to the terms of
unsecured promissory note from the Company. The loan bears interest at the rate
of 10% per annum and is payable on demand. In conjunction with this loan, the
Company agreed to issue to the Lender 49,013 shares of its Common Stock and
paid a financing fee of $32,675.
Founders Loan
On June 3, 1999, the Company completed a loan agreement with Founders
Equity Group, Inc., as agent for several private lenders (the "Lenders")
providing for a loan in the original principal amount of $3,000,000 that was
originally due and payable on October 1, 1999 unless extended (the "Founders
Loan"). The Founders Loan bears interest at the rate of 10% per annum. The
Founders Loan can be converted into 600,000 shares of the Company's common stock
plus warrants to purchase 300,000 shares of common stock at an exercise price of
$5.00 per share.
In conjunction with the Founders Loan, the Company issued to the Lenders
three-year warrants to purchase 375,000 shares of the Company's common stock at
an exercise price of $5.00 per share. In
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conjunction with the placement of the financing, the Company paid to a financial
advisor a facilitation fee of $150,000 and three-year warrants to purchase
75,000 shares of the Company's Common Stock at an exercise price of $5.00 per
share. As security for its repayment obligations under the Founders Loan, the
Company granted a security interest on certain of its assets, including without
limitation, the assets of any current subsidiaries and any subsidiaries which
are acquired subsequent to the completion of the financing, provided, however,
that such interest is subordinate to the interests of certain other creditors
of the Company.
On November 2, 1999, the Company and the Lenders in the Founders Loan
transaction described above entered into an amendment of the loan agreement
primarily to extend the maturity date of the indebtedness to July 1, 2000. In
addition, the Company agreed to pay interest on the Founders Loan at the rate of
18% from October 1, 1999 to July 1, 2000 and issue to the Lenders, as additional
consideration, 150,000 shares of the Company's Common Stock.
In connection with the amendment to the Letter Agreement, the Company
agreed to issue three-year warrants to purchase up to 300,000 shares of Common
Stock at an exercise price of $5.00 per share, subject to vesting provisions
based on the repayment by the Company of the outstanding principal of and
interest on the Founders Loan. Warrants to purchase 100,000 shares of Common
Stock were to vest in the event that on each of the following dates the Company
has not made aggregate repayments of principal of (i) $500,000 on or before
November 9, 1999, (ii) $1,500,000 on or before November 30, 1999 and (iii)
$3,000,000 on or before December 15, 1999. As of the date of this report, the
Company has repaid $500,000 of the Founders Loan. Because the Company had not
made aggregate repayments to the Founders Lenders of $3,000,000 by December 15,
1999, a total of 200,000 of the warrants vested on December 16, 1999, and are
exercisable currently in accordance with their terms.
The amended Founders Loan requires the Company to prepay $1,000,000 in the
event the Company receives net proceeds of at least $5,000,000 from any debt
transaction (other than refinancing of the Company's senior line of credit) or
subsequent equity financings, and an additional $1,500,000 if the net proceeds
from such financings is at least $6,000,000.
The Company also agreed in connection with the Founders Loan to register
for resale the Common Stock into which the principal amount of the loan may be
converted and the shares, which are issuable upon the exercise of warrants,
granted to the Lenders. As a result of the amendment to loan agreement, the
Company was required to use its best efforts to have such a registration
statement declared effective on or before January 17, 2000. No registration
statement with respect to such shares had been declared effective by January 17,
2000, and therefore the Lenders have the option to require the Company to (i)
pay the Lenders $25,000 for each 30-day period during which the registration
statement has not been declared effective, or (ii) issue to the Lenders
additional warrants to purchase up to 150,000 shares of Common Stock at an
exercise price of $5.00 per share.
Other Short-Term Loans
During October, November and December 1999, the Company entered into
several short-term loan agreements arranged by a financial advisor. The total
amount of the loans as of December 31, 1999 is $1,060,000. Most of the notes
matured during the month of December 1999, with one note in the amount of
$100,000 maturing on January 2, 2000. The notes bear interest at 10% per year.
In connection with the funding of the notes the Company paid $62,500 in fees and
issued a total of 75,750 shares of its common stock as additional consideration.
During the month of January 2000, the Company entered into several
additional short-term (90-day) loan agreements also arranged by a financial
advisor. The total amount of loans is $3,837,500 and bear interest at 10% per
year. The Company received proceeds of $3,493,200 from such loans, net of cash
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financing fees of $187,500. In addition to the cash and capitalized financing
fees the Company issued 300,000 shares of its common stock and 50,000 five year
warrants to purchase the Company's common stock at a price of $7.75 per share as
additional consideration.
Note 3. Long -Term Debt
Bridge Loan
On August 13, 1999, the Company completed a $1,000,000 short-term bridge
financing (the "Bridge Loan") with a private lender. The Bridge Loan called for
interest at 10% per annum and was due and payable on November 11, 1999. The
Bridge Loan was refinanced as part of the Lancer Loan transaction described
below. In conjunction with the Bridge Loan, the Company issued 75,000 shares of
its Common Stock to the lender in further consideration for the extension of the
Bridge Loan.
Lancer Loan
On November 9, 1999, the Company and Lancer Offshore, Inc., Lancer
Partners, L.P. and Michael Lauer (collectively, the "Lancer Lenders") entered
into a Loan Agreement pursuant to which the Company borrowed $9,000,000 (the
"Lancer Loan"). The maturity date for the Lancer Loan is February 9, 2001 and
interest is payable on the Lancer Loan at a rate of 10% per annum. The Lancer
Loan may be prepaid at any time by the Company, and mandatory prepayments are
required in the amount of 50% of the net proceeds realized by the Company from
any debt or equity financing transaction completed after December 20, 1999. A
portion of the Lancer Loan refinanced the Bridge Loan entered into on August 13,
1999.
As security for the Company's repayment obligations under the Lancer Loan,
the Company granted to the Lancer Lenders a third position security interest in
all of PONY's assets.
On and after December 20, 1999, any outstanding principal amount of and
interest on the Lancer Loan may be converted into common stock of the Company at
a rate of $1.00 per share. See Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, for a further discussion of the
convertibility of the Lancer Loan. In consideration for the Lancer Loan, the
Company also agreed to issue to the Lancer Lenders 300,000 shares of common
stock and five-year warrants to purchase 500,000 shares of common stock at $5.00
per share. Subsequent to the funding of the Lancer Loan, the Company and a
principal stockholder of the Company agreed that the stockholder would transfer
300,000 shares of the Company's common stock owned by the stockholder to the
Lancer Lenders in partial satisfaction of the Company's obligation to issue an
aggregate of 375,000 shares of Common Stock to the Lancer Lenders.
The Company agreed to register for resale with the Securities and Exchange
Commission the shares of stock issued to the Lancer Lenders at the closing, the
common stock issuable upon the exercise of the warrants issued to the Lancer
Lenders at closing and the shares of stock into which the Lancer Loan itself may
be converted on the next registration statement on which the Company files. In
connection with the funding of the Lancer Loan, the Company paid $450,000 to a
financial advisor who assisted the Company in arranging the financing and will
be required to pay an additional placement fee of 3.0% of the principal amount
of the portion of the Lancer Loan converted into Common Stock. The Company also
granted to the placement agent the right to nominate two members to the
Company's Board of Directors.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Unless the context otherwise requires, the "Company" refers to Skynet
Holdings, Inc. and its wholly owned subsidiaries.
Forward Looking Statements
The words "may," "will", "expect," "anticipate," "believe," "continue,"
"estimate," "project," "intend," and similar expressions used in this report are
intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
made. We undertake no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events. You
should also know that such statements are not guarantees of future performance
and are subject to risks, uncertainties and assumptions. Should any of these
risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may differ materially from those included within the
forward-looking statements.
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The Company is a full service provider of international transportation
delivery services operating primarily as an express courier for time sensitive
documents and packages. These services are formulated on a customized basis to
meet the special needs of a diverse international customer base. The Company
provides these services through Company-owned offices as well as through a
global network of over 1,000 offices, which are independently owned and operated
in over 100 countries.
During the six months ended December 31, 1999 and since that time through
the date of this report, the Company has encountered significant cash shortages,
resulting primarily from the Company's continued losses from operations. These
frequent cash shortages have had significant negative effects on operations and
have prevented the Company from pursuing its acquisition strategy. As a result,
the Company has not been able to realize the benefits of consolidating its
operations with those of other smaller regional courier companies it considered
to be acquisition candidates in its overall acquisition strategy developed in
late 1998 and 1999.
The Company's cash resources may not be adequate to continue funding PONY's
operating losses at historical levels for more than the short term. To date,
the Company has been able to obtain short-term financing which has enabled it to
continue without significant disruption in day-to-day operations. Management
cannot predict whether such financing will continue to be available, and if such
financing is not available within the short term, it is likely that the Company
would have to consider reducing the scope of the Company's operations will be
negatively affected.
A significant factor in the Company's ability to raise necessary funds by
issuing the Company's equity securities will be the price at which the Company's
common stock trades in the public market from time to time. As noted more fully
in the Company's Annual Report on Form 10-K for the period ended June 30, 1999,
the historic public trading market for the Company's common stock has been
fairly thin, with relatively few of the Company's shares being available for
public trading. The required holding periods to which a significant number of
shares of common stock issued in private transactions as "restricted securities"
under the 1933 Act are subject have begun to expire, and the Company has entered
into agreements with other holders of restricted securities which obligate the
Company to register a significant number of restricted securities for public
resale. A significant and sudden increase in the number of shares available for
public trading could result in a reduction of the price at which the Company's
common stock trades in the public markets. It is not possible at this time to
quantify the effect on the public markets of this additional amount of publicly-
tradable common stock, nor is it possible to predict what effect a resulting
reduction in the public trading price will have on the Company's ability to
raise capital through additional issuances of its common stock, although the
Company expects it will be negatively affected in such an event.
The Company continues to speak with prospective financing sources with a
view to obtaining permanent long-term financing to replace the various short-
term and intermediate-term financing arrangements it has been required to enter
into. Again, while management is hopeful that permanent long-term financing can
be put in place in the near future, no assurance can be given that any such
financing will be available to the Company, either in the near-term or at all.
Results of Operations
Revenues. Revenues for the three and six months ended December 31, 1999
amounted to $35,352,317 and $71,575,329 compared to $8,877,144 and $16,947,089
for the three and six months ended December 31, 1998, an increase of
$26,475,173 and $54,628,240, respectively. The year to date increase in revenues
of $53,640,537 resulted from the acquisitions of Fleet and PONY, which occurred
on March 15, 1999 and June 17, 1999 respectively.
Cost of sales. Cost of sales for the three and six months ended December
31, 1999 amounted to $29,010,419 and $56,269,671, respectively, compared to
$5,059,102 and $10,101,814, respectively for the three and six months ended
December 31, 1998. As a percentage of sales, such costs amounted to 82.1% and
78.6% for the three and six months ended December 31, 1999 compared to 62.5% and
59.6% for the corresponding periods of the prior year. The deterioration for
the three and six months ended December 31, 1999, resulted primarily from
integration issues relating to the acquisitions of Fleet and PONY and higher
rates paid to other carriers acting as subcontractors for the Company.
Operating expenses. Total Operating expenses for the three and six months
ended December 31, 1999 amounted to $9,838,447 and $20,293,282, respectively,
compared to $3,853,099 and $7,191,825, for the comparable periods for the prior
year. The period to period increases in expenses are attributable to the
addition of Fleet and PONY.
Interest expense. Interest expense for the three and six months ended
December 31, 1999 amounted to $1,873,579 and $2,144,583, respectively, compared
to $104,616 and $162,899 for the comparable
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periods for the prior year. The increases in a large part are the result of the
Company recognizing approximately $1.2 million in amortization expense related
to loan costs incurred by the Company. The remainder results from the addition
of Fleet and PONY.
Liquidity and Capital Resources
As noted earlier, the Company's cash position during the six months ended
December 31, 1999 and since that date has been severely constrained, primarily
as a result of the Company's continuing and significant operating losses.
Total cash and cash equivalents at December 31, 1998 and 1999 amounted to
$78,455 and $883,253. The increase results primarily from the acquisition of
PONY and Fleet and the additional financing received during the period.
Net cash used in operating activities during the six months ended December
31, 1998 and 1999 amounted to $1,555,017 and $10,438,778. The increase during
the six months ended December 31, 1999 primarily results from the acquisition of
Fleet and PONY and the increase in net loss for the period.
Net cash used in investing activities during the six months ended December
31, 1998 and 1999 amounted to $253,269 and $216,937. The increase results
primarily from increases in deferred financing fees and the acquisition of
Fleet and PONY.
Net cash provided by financing activities during the six months ended
December 31, 1998 and 1999, amounted to $1,495,678 and $10,050,441. The increase
results from borrowing activities necessary to fund the operating losses
sustained by the Company.
At June 30, 1999 and December 31, 1999, management provided 100% valuation
allowances amounting to approximately $722,000 against the net deferred tax
asset represented by its net operating loss carry forwards due to the
indeterminate nature of the Company's ability to realize this deferred asset.
As discussed in the notes to the financial statements included earlier in
this report, on November 9, 1999, the Company completed the Lancer Loan. The
Lancer Loan has provided a significant portion of the Company's recent cash
resources. The terms of the Lancer Loan provide that the principal of and
interest on the loan is convertible into Common Stock at a rate of $5.00 per
share at any time on or before December 20, 1999. Because the Lancer Loan was
not repaid by December 20, 1999, any outstanding principal of or interest on the
loan is now convertible into Common Stock at a rate of $1.00 per share
commencing December 21, 1999. The full principal amount of the Lancer Loan was
outstanding as of December 31, 1999 and remains outstanding as of the date of
this report and is currently convertible into 9,000,000 shares of Common Stock,
which, if converted would represent approximately 30.8% of the Company's
outstanding stock, resulting in significant dilution of the positions of the
current holders of the Company's Common Stock.
The Company was not in a position to repay fully the Lancer Loan on or
before December 20, 1999, therefore, as of December 21, 1999 the Lancer Lenders
are able to convert the Loans to Common Stock at a rate of $1.00 per share. A
conversion of the Lancer Loan at $1.00 per share may result in adjustments to
the conversion features of other convertible instruments previously issued by
the Company, which adjustments could result in additional common stock being
issued upon the exercise of such instruments and the possible further dilution
of the positions of existing holders of Common Stock. The Company has also
entered into an agreement limiting the Company's ability to issue Common Stock
below specified per share prices without the prior written consent of the other
party to the agreement. Issuing Common Stock to the Lancer Lenders at $1.00 per
share would require the consent of the other party, the availability of which
consent cannot be
Page 12
<PAGE>
ascertained at this time. As of January 31, 2000 Lancer has not exercised its
option to convert the outstanding loan balance and accrued interest into the
Company's common stock.
The Company anticipates that, during the next six (6) months it will need
to provide funding to cover operating losses, working capital requirements and
reduce existing bank and other indebtedness. Based upon current estimates, the
Company believes that it will need between $6.9 and $13.8 million in advances.
The Company's present capital resources are not sufficient to meet these needs
on a short-term or longer-term basis. Accordingly, the Company will be required
to secure additional funding, either through incurring additional indebtedness
or through the sale of equity securities. If such additional funding cannot be
obtained, the operations of the Company could be negatively affected.
When its financial position permits it to do so, the Company intends to
resume its previously developed acquisition strategy. This may involve
acquiring target companies for cash, indebtedness, newly issued securities, or a
combination thereof. The Company will likely require additional operating
capital in order to finance any acquisitions that involve material cash
components. In addition, the Company will likely require additional capital to
finance the continued growth of the Company, to the extent its acquisition
strategy is successful. The Company intends to investigate the availability of
alternate bank or institutional financing sources to replace its current
borrowing arrangements, although no assurance can be given that alternate-
financing sources will be available to the Company on acceptable terms. The
Company may also seek additional funds from public or private offerings of debt
or equity securities to the extent available to the Company.
A foreign subsidiary of the Company has a financing agreement with a bank
in London. The agreement provides borrowing for the subsidiary based on 75% of
customer receivables generated from accounts in the United Kingdom, which are
less than 90 days old up to a maximum of $1,700,000. The subsidiary pays an
administrative charge of .2% plus interest at the bank's base rate plus 2.25%
(5.5% at December 31, 1999). Borrowings under the agreement amounted to
$870,352 at June 30, 1999 and $1,042,000 at December 31, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk sensitive instruments do not subject it to
material market risk exposures, except for such risks related to interest rate
fluctuations and foreign currency exchange rates. The carrying value of bank
debt and long-term debt approximates fair value at June 30, 1999 and December
31, 1999 since these notes substantially bear interest at floating rates based
upon the lenders' "prime" rate.
Although the Company currently bills only in U.S. and Australian dollars
and British pounds, exchange rates for these and other local currencies in
countries where the Company may operate in the future may fluctuate in relation
to the U.S. dollar and such fluctuations may have an adverse effect on the
Company's earnings or assets when local currencies are exchanged for U.S.
dollars. Any weakening of the value of such local currency against the U.S.
dollar could result in lower revenues and earnings for the Company. To date,
gains and losses related to foreign currency transactions and foreign currency
translation have not been material for the Company.
Included in the Company's consolidated balance sheets at June 30, 1999 and
December 31, 1999 are the net assets of the Company's United Kingdom subsidiary
of approximately $125,000 and $(55,000) and the Company's Australian subsidiary
of approximately $623,000 and $(80,000) for the same periods.
Page 13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has become subject to various lawsuits, claims and other legal
matters in the ordinary course of conducting its business. Other than as
reported in the Company's Annual Report on Form 10-K for the year ended June 30,
1999, as of the date of this Report, management believes that there are no legal
proceedings pending, the adverse resolution of which is expected to have a
material adverse financial impact on the Company's consolidated financial
position.
Item 2. Changes in Securities
During the months of September and October 1999, the Company entered into
agreements for approximately $1.56 million in unsecured short-term loans payable
to the Lenders. In consideration for such loans, the Company paid financing
fees of 5.0% of the principal amount borrowed and issued 75,750 shares of its
Common Stock to the lenders pursuant to exemption under section H(2) of the
Securities Act of 1933 as amended ("The 1933 Act").
On November 2, 1999, the Company entered into an amendment to the letter
agreement related to the Founders Loan. In consideration for extending the due
date of the loan to July 1, 2000, the Company agreed to several provisions,
which are described in detail in Note 2 to the financial statements. The Company
issued 150,000 shares of its common stock and, subject to certain vesting
condition, 300,000 common stock warrants to the Lenders as financing fees. The
warrants have an exercise period of three years and 200,000 of the warrants have
an exercise price of $5.00 per share and became fully vested as of December 16,
1999. The remaining 100,000 warrants issued to the Lenders failed to vest and
were cancelled by their terms.
On November 9, 1999, the Company completed a $9.0 million financing
agreement (the Lancer Loan) which is more fully described in Note 3 to the
financial statements. As a portion of the financing fee payable to the Lenders,
the Company issued to the Lenders warrants pursuant to an exemption under
Section 4(2) of the 1933 Act 500,000 five-year common stock purchase warrants
exercisable at a price of $5.00 per share.
Item 3. Defaults Upon Senior Securities.
As discussed in Note 2 the financial statements included earlier in this
report, on September 29, 1999, Bank of America notified PONY that certain
events of default had occurred under the Credit Agreements between PONY, Courier
Express, Fleet and Bank of America. On October 6, 1999, Bank of America advised
PONY that it would not currently exercise remedies available to it under the
Credit Agreements with respect to such defaults, and on December 8, 1999, PONY
and Bank of America reached an agreement whereby Bank of America agreed not to
exercise its remedies under the Credit Agreements before March 8, 2000. See note
2 of the financial statements for a further discussion of this issue.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
Page 14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYNET HOLDINGS, INC.
Date: February 14, 2000 /s/ Byron Hogue
---------------
Byron Hogue
Chief Executive Officer
Date: February 14, 2000 /s/ William H. Bethell
-----------------------
William H. Bethell
Chief Financial Officer
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> JUL-01-1999 OCT-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 883,253 0
<SECURITIES> 0 0
<RECEIVABLES> 21,490,563 0
<ALLOWANCES> 2,659,840 0
<INVENTORY> 33,066 0
<CURRENT-ASSETS> 21,491,301 0
<PP&E> 9,198,985 0
<DEPRECIATION> 2,583,812 0
<TOTAL-ASSETS> 47,861,486 0
<CURRENT-LIABILITIES> 37,047,081 0
<BONDS> 0 0
285 0
0 0
<COMMON> 2,026 0
<OTHER-SE> 15,871,582 0
<TOTAL-LIABILITY-AND-EQUITY> 47,861,486 0
<SALES> 71,575,329 35,352,317
<TOTAL-REVENUES> 71,575,329 35,352,317
<CGS> 56,269,671 29,010,419
<TOTAL-COSTS> 56,269,671 29,010,419
<OTHER-EXPENSES> 3,471,337 2,660,424
<LOSS-PROVISION> 112,863 68,307
<INTEREST-EXPENSE> 2,144,583 1,873,579
<INCOME-PRETAX> (8,458,961) (6,156,973)
<INCOME-TAX> 5,190 (6,163,771)
<INCOME-CONTINUING> (8,464,151) (6,163,771)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,464,151) (6,163,771)
<EPS-BASIC> (0.42) (0.31)
<EPS-DILUTED> (0.42) (0.31)
</TABLE>
